BERLIN — Central Vermont Medical Center, like hospitals across both the state and nation, is facing financial challenges as a result of the federal sequestration that is cutting off income.

“This year we are holding our own, breaking even from operations,” acknowledged Judy Tartaglia, the hospital CEO. “We need to be operating at a reasonable level, which we had in 2012.” In 2012 annual revenue at CVMC was $160.3 million.

Last year, according to figures from the Vermont Department of Financial Regulation website, CVMC had gross patient revenue of $265,334,412. Its total net operating revenue was $161,282,181, and total operating expenses were $157,484,709. Thus its operating margin was $3,797,472.

“As an organization we have a fiscal duty to return a positive result,” said hospital CFO Cheyenne Holland. “We want a two- to three-percent operating margin to cover ongoing replacement of capital goods. Our bankers look at our credit and want that operating margin.” Last year’s margin of $3.7 million was “a good year.”

Under the sequestration cuts, Medicare reimbursements will be reduced by $2 million, but, said Holland, “we still have to provide the same services.”

Sequestration, the automatic, across-the-board cuts in federal spending, included a two percent decrease in Medicare reimbursement for physicians. The first round of cuts, which amount to about $11 billion to the Medicare system nationally, were put off until the beginning of March, but it took until April 1 for the Centers for Medicare & Medicaid Services to implement the changes.

The current federal sequester was authorized by the Budget Control Act (BCA) of 2011, which tasked a bipartisan “supercommittee” with proposing at least $1.2 trillion in deficit reduction over 10 years for lawmakers to approve. Failure to achieve this goal would trigger an equal level of sequestration, beginning Jan. 1, 2013, that would apply to defense as well as domestic spending. Medicare benefits, Social Security, and Medicaid were off-limits.

Congress could have rolled back sequestration and the physician pay cut when it recently passed a stopgap spending bill to fund government operations through Sept. 30, the last day of fiscal 2013. Instead, the legislation preserved sequestration.

The Medicare cuts, which are approximately $2 million in decreased revenues for CVMC in fiscal year 2013, are ongoing, said Holland. “They are not going to give us a bunch of money next year,” she forecast.

The cut in revenues will lead to a variety of measures aimed at avoiding going into the red for the nonprofit institution. CVMC shares this revenue decline with all hospitals in the state and nationally. “It’s every hospital in the country, and many are struggling where we are,” notes Holland.

The remedies for meeting margin projections would be across the board, Holland said. CVMC’s affiliation with Fletcher Allen Health Care in Burlington means the two hospitals will use their combined purchasing power to reduce costs. She sees the reduction in the price of supplies projected to save “about $1 million through purchasing power.”

Another $1 million in savings may come through the One Care affiliation with Fletcher Allen and Dartmouth-Hitchcock Medical Center, which is a program through the Medicare Shared Savings Program. As Holland explained it, “by instituting programs that can show savings we are able to share the savings.” Vermont hospitals are low-cost providers in general, Holland said, and provide a good value to Medicare. As a result, “Medicare may give us back some of the cuts.”

The hospital will also do some “old-fashioned belt tightening,” Holland said, “by looking at what we don’t need to purchase.” There will, however, be no reduction in force, although there will be scrutiny of vacancies for contracted services, and other positions, for potential savings. Also there will not be salary reductions.

Tartaglia, the hospital CEO, said job cuts are not realistic for an institution where there are many competitive salaries for high-demand professionals in nursing, technicians, therapists, pharmacists and such. “We need these people to run a hospital, so we need to stay competitive,” she emphasized.

CVMC is an important industry in central Vermont. In 2012 it spent $96.1 million on wages and benefits for all hospital employees and contracted physicians. In figures provided by the hospital, in fiscal 2012 CVMC spent over $15.7 million in purchases from Vermont businesses and individuals. The hospital paid over $8.6 million in taxes to the state (provider taxes).

The latest available figures from VAHHS show that in 2009, Central Vermont Medical Center generated approximately $93.5 million in total economic impact in Vermont. This includes direct spending of approximately $40.7 million within the state. VAHHS says “the ripple effect of in-state spending accounts for more than $52.8 million, representing downstream spending by employees, vendors and contractors.” In that same year, CVMC “injected nearly $11 million into state government programs.”

As of FY 2012, the hospital employed 1,086 full-time employees and the average salary was $55,410. The employment figures break down into 589 non-clinical, 252 clinical, 570 nurses and 138 physicians, physician assistants, and nurse practitioners.

The hospital has no new construction planned for the foreseeable future. The last major renovations were completed in 2007. “I don’t see expansion or new construction undertakings,” said Tartaglia. No new medical office buildings are planned and “our facilities are in good shape,” she said. The last addition was the Cancer Center built in 2010.

The hospital does carry a capital replacement budget on existing equipment and depreciation, which amounts to $10 million a year.

Tartaglia said another potential financial problem for the hospital stems from an increase in inpatient volume coupled with a decline in outpatient volume.

The issues around the sequester and its cuts do carry implications for the future. “It will be increasingly more difficult for hospitals to make ends meet and pay their bills,” said Tartaglia. She sees continued pressure from federal and state medical cost control agencies to reduce costs, become more efficient, optimize capacity, and “to integrate our clinical services to the extent we can.”

Not all will be negative in this scenario, she explained. “On a positive note you’ll see more hospital collaboration, and hospitals will be more willing and able to collaborate.”

Some hospitals will join larger systems by partnering. In the final analysis, said Tartaglia, “my job is to make sure the cuts don’t hurt the patients.”